The tenant must seek approval in writing from the landlord to transfer the lease and generally the landlord cannot unreasonably withhold consent. The 2016 R.E.I.V. lease deals with lease transfers in clause 14 and in the L.I.V. Lease 2014 edition it is dealt with in section 4.
Each lease has particular clauses and conditions which must be checked when the request to transfer the lease is received. In the case of retail leases, section 60-62 of the Retail Leases Act 2003 deals with circumstances where the landlord can withhold consent as follows:
60. When the Landlord can withhold consent to an assignment -
(1) A landlord is only entitled to withhold consent to the assignment of a retail premises lease if one or more of the following applies -
(a) the proposed assignee proposes to use the retail premises in a way that is not permitted under the lease;
In the case of sub clause (a) the landlord is generally protected from a type of use which the landlord may object to such as a rival tenancy or unpalatable use.
(b) the landlord considers that the proposed assignee does not have sufficient financial resources or business experience to meet the obligations under the lease;
With sub clause (b) it is not unusual that the incoming tenant is inexperienced or does not have substantial cash reserves or significant assets. In cases such as this it is important to request a statement of assets and liabilities on the company and directors or the individual(s) if a company is not the proposed assignee. If the company or individual(s) own the property it is advisable to request a copy of a council rate notice (or conduct a title search) to ensure the owner is correctly listed. If other parties are listed on the rate notice who are not the proposed assignee, such as a spouse, in the event of default, the property can be transferred stamp duty free effectively out of reach or creditors.
References are also required, particularly rental references. This is a primary method of establishing if the tenant pays on time or has been difficult to deal with. Personal and trade references generally carry less weight. In order to assess the tenants' background it is not unusual to request a history of the tenant's experience. Have they owned and run businesses or managed them? Or, perhaps they have little industry experience.
Previously it was a requirement to provide a business plan, however it is not required under the Retail Leases Act 2003 now. Some tenants, however, will provide one as a bona fide display of their intentions.
In some instances the agent may request a credit report on the proposed assignee company and bankruptcy and other checks on the directors. Privacy consent needs to be obtained before a credit agency will process an application on individuals. ASIC also publish the names of people who are banned from being a company director and this can also be checked on the ASIC website.
If the items noted in (b) are positive then the transfer may be approved. If however they are not sufficient then there are some difficult decisions to be made. The landlord can refuse the transfer. The landlord can seek an increase on the security deposit or the provision of additional guarantors. It is unusual to vary the terms by consent such as the level of rent or outgoings. It is not unusual for assignees to seek additional lease options to preserve the value of goodwill and allow for the amortization of any refit costs.
(c) the proposed assignor has not complied with reasonable assignment provisions of the lease.
In the case of sub clause (c), for the assignor not to comply with reasonable assignment provisions this may extend to not providing a disclosure statement to the assignee, not providing adequate documentation to evidence the transfer, there may be an un-remedied default or condition not complied with such as an incomplete fit out and lack of permits.
(d) the assignment is in connection with a lease of retail premises that will continue to be used for the carrying on of an ongoing business and the proposed assignor has not provided the proposed assignee with business records for the previous 3 years or such shorter period as the proposed assignor has carried on business at the retail premises.
Finally, with sub clause (d) it can be difficult to establish that the assignor has provided business records to the assignees so it is important to seek confirmation from the proposed assignee in writing.
Section 61 of the Act outlines the information to be provided by a tenant to the proposed assignee and the landlord. Be aware of sub clause (5) wherein the landlord must provide an updated disclosure statement if requested to do so within 14 days of a request to do so or penalties apply. Sub clause (6)(b) also requires the landlord to accept or withhold consent within 28 days or receiving a request to assign. If the landlord fails to act within this time frame it may be that the transfer is deemed to have occurred.
Section 62 of the Retail Leases Act 2003 has the effect of releasing the tenant and guarantors as at the date of transfer provided a compliant disclosure statement has been issued. It is therefore important to have replacement guarantors in place or an increase in security bond. This release does generally not apply to a non retail lease and the lease should be checked to ensure that. It is also worth noting that a change of the permitted use for a retail tenant does not automatically release the assignor or guarantors. Protection for assignors and guarantors was intended only when a sale of the business occurred.
For a transfer to occur a transfer deed has to be prepared. This is usually prepared by the solicitor for the proposed assignee and is often in the L.I.V. format and is reviewed by the landlord's lawyers.
The landlord is able to recover reasonable costs in relation to expenses occurred by the managing agent and the landlords' solicitor in relation to the transfer. Occasionally, mortgage consent is required and the landlord must provide it although cannot recoup any costs under section 51 (1)(b) of the Act.
The vetting process does require suitable skill and experience to ensure that the landlord is overall in no worse position than before and that as much is known about the proposed assignee as possible.
The consequence of not managing the process correctly are arrears and vacancy or an unenforceable lease agreement. If not handled skilfully, the matter may also end up at mediation or VCAT so the correct advice must be sought from your property manager or solicitor.
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